Latin America is marked by high and persistent inequality in income, schooling, and land ownership. In such an unequal environment, the powerful are likely to dominate politics and push for policies that protect their privileges rather than foster competition and growth. As a result, changes in policies that political elites resist may be postponed to the detriment of overall economic performance.
This paper examines the relationship between structural, high inequality—measured by high levels of schooling inequality—and liberalization of the financial sector for a sample of 37 developing and developed countries for the period from 1975 to 2000. Before 2000, liberalization of the financial sector in Latin American consisted of opening credit markets that had been largely restricted, including by ending directed credit. The authors find that increases in financial liberalization were associated with bank crises and other domestic and external shocks, and that higher schooling inequality reduces the impetus for liberalization brought on by bank crises.